From the March 2009 issue of Treasury & Risk magazine

Not-So-Easy-Rider

"We're in a financial hurricane," says Paul Bowers, CFO of the $15.4 billion Atlanta-based Southern Company, "but we know a thing or two about outdoor hurricanes. It's our job to restore services and get the lights back on. We're good at it. Now we're applying some of that logic and culture to riding out a financial hurricane."

To survive this tempest, Bowers is keeping a weather eye on three contributing factors. One is consumer spending, as it relates to power usage. While electricity might seem one of the last places where consumers would cut back, Southern Company is keeping a close eye on its customers these days. "When we had $4-a-gallon gasoline, people adjusted their lifestyles and reassessed their use of energy," he says. And that affected household utilities. "We found that per-customer usage was down 3.1% in the third quarter. People are finding ways to use our product more efficiently," he reports, "so we're watching our customer base closely and tracking how consumers are adjusting." That negative number reflects a growing supply of unsold or abandoned homes as a result of the mortgage crisis, he adds. Another front that has Bowers' attention is the corporate debt market. "We're very capital intensive," he says. "We need large amounts of capital." For Southern Company, raising capital means selling bonds.

"The issue for us has not been access but cost," he explains. "We're fortunate to have high credit ratings (A1/P1 short-term; A/A2 long-term), but we stayed out of the market for a while because rates were so volatile and generally high. Recently, we've come back in and issued $1 billion of new debt, mostly five-year notes at around 6%." If he could get one useful peek into a crystal ball to see what the financial environment would look like in 2010, it would be a glance at what investment-grade bonds are yielding.

Bowers went to work for Southern Company the year after he graduated from college in 1979 and was named CFO in 2008. He's more of an energy executive who landed in finance than a finance executive who settled in an energy company. His resume shows such titles as chief marketing officer, CEO of a U.K. affiliate and president of Southern Company Generation but no explicitly financial positions. But knowing energy markets better than capital markets is okay for a utility CFO, he says. "It helps to have a broad understanding of the business you're in," he says. "You understand what the divisions and affiliates need and why certain requests are being made. A CEO of an energy operation is always involved in financial issues around acquisitions and divestitures. And running a capital-intensive business, you're always aware of the trading function."

And while Southern Company has a promote-from-within culture, recent Wall Street layoffs have flooded the market with available experts in high finance, providing a ready supply of top candidates if Bowers had finance positions to fill. "This is a great time to recruit impressive financial talent," he says.

Bowers' relationship with his treasury staff has changed noticeably in the past year. "Typically, treasury would report to the CFO once or twice a month, but now we have conversations almost daily. It's all about liquidity and access to the capital markets," he says. The financial planning and analysis staff has always been engaged in capital planning and running scenarios, but now the scenarios consider more extreme possibilities. "We're looking closely at our worst-case and best-case scenarios," he explains.

Investor relations also is adapting to new demands. "We've stepped up our communications to make sure we get our story across. We've had around 200 meetings in 2008 with analysts and investors, both individually and in groups, many of them face-to-face. And our investors are global, so our communication strategy has to mirror that," Bowers says. "You just can't over-communicate in times like these. We've seen a substantial increase in travel, teleconferences and time spent on the phone with investors."

While Southern Company has a group of 40 credit banks, the problems plaguing the banking industry are not "a big issue for us." The bank facilities just back up the capital market programs, where the firm draws most of its credit. "We're watching our deposits and paying attention to the consolidation that's going on, and we're reacting prudently, but the bank problems haven't caused any major disruption for us."

In some ways, Southern Company is benefiting from lucky timing. "Fortunately, we were taking our own strategic steps to a more conservative focus on fundamentals at the same time that the markets were turning risk-averse," Bowers says. "We were reassessing our basic financial strategy, including dividends. So we were somewhat in synch with the markets and didn't have to put the brakes on any aggressive moves."

Like many companies, Southern Company is delaying some capital expenditures, but only modestly because it has many fixed costs. After railroads, utilities are the most capital-intensive industry in the country, Bowers points out. But Southern Company is limited in how much it can cut back or delay capital outlays since the majority of its capital budget goes to environmental compliance and replacement generation. "We have capacity contracts expiring that we have to replace," he says. "For transmission and distribution, we have maintenance cap ex and growth cap ex, and that growth cap ex is the one place we have room to adjust to new economic realities, which we are doing."

The supply chain is getting more attention than usual, although Southern Company relies mostly on long-standing relationships with solid suppliers. "We constantly address the risk of a supplier not being able to perform," Bowers says. "This is nothing new for us, but we're asking more questions than usual now."

Bowers also keeps a close eye on Washington. "We're preparing to take an active role in the coming dialog," he says. Besides all the environmental initiatives that obviously could affect power companies, the stimulus package, tax depreciation schedules and even foreign policy could have major consequences for Southern Company. Even the auto bailout is important. "We have a large auto sector," he notes.

Energy demand and environmental standards are critical. With its Southeastern franchise, Southern Company is not ideally located to generate wind or even solar power, but it has filed plans to build a nuclear facility in Augusta, is proposing using biomass to produce electricity in Georgia and is exploring ways to convert coal to gas. "We don't think there's a silver bullet," Bowers says. "We're taking a portfolio approach."

Bowers downplays the stress that caused The Wall Street Journal in December to identify CFOs as holding "the least secure job in corporate America." "We have a cadre of talented folks to carry the load," Bowers says. "Without them, it would be impossible." And while he admits to putting in long hours these days, he says he has always worked long hours. "There's always more work to do than time to do it," he says. "What has changed are the things we work on, like paying more attention to liquidity."

Bowers savors a sense of satisfaction for how Southern Company has fared over the past six months. "We've performed extremely well compared to other companies when you look at our profitability metrics, our stock price, our P/E ratio. We got our story out into the marketplace, and investors still have confidence in our management and like to buy our bonds. So we're proud but we're also wary and attentive. For now, we're weathering this hurricane and the lights are still on."

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